NEW YORK (AP) -- Dow Chemical Co.'s move to cut costs by reducing its work force by 11 percent is a step in the right direction, an analyst said Tuesday, but challenges loom for the company as it looks to integrate a joint venture and upcoming acquisition.
The company on Monday said it will eliminate 5,000 jobs and prune 6,000 contractors from its payroll. Dow is also closing 20 plants and temporarily idling 180 plants.
"Dow wants to change, but the cost of change isn't likely to be recovered quickly in a difficult economy, and given the scope of the change involved, investors are likely to want to see substantial evidence of progress before they are willing to price it into the stock," Credit Suisse analyst Mark W. Connelly wrote in a note to clients.
Dow is spinning off part of its plastics business into a joint venture with a Kuwaiti company that will be called K-Dow Petrochemicals. The Midland, Mich.-based company also is buying Rohm & Haas Co. for about $15.3 billion.
Full integration "requires a dramatic cultural change within Dow, not just a merger integration, and those tend to take place slowly, when they take place at all," Connelly said, reducing his earnings estimates for 2008 and 2009.
"Dow's operating earnings should improve with the transactions, even in this economic environment," Connelly wrote. "But transformation does not come cheap, and Dow's task is to overcome the premium paid for Rohm and Haas ... in a period where tail winds are long gone." The analyst rates Dow "Neutral."
Meanwhile, Citi Investment Research analyst P.J. Juvekar said Dow is taking the correct actions to eliminate costs and right itself amid the current recession.
"Companies like Dow that have big fixed cost structures need to cut back quickly during a downturn," Juvekar wrote in a client note, maintaining a "Hold" rating.
Wall Street appeared to cheer news of the job cuts and plant closings on Monday, sending the stock up more than 7 percent to close at $20.37. In morning trading Tuesday, the stock fell 30 cents to $20.07.
